By Roger J Kerr
The speed at which the NZ dollar moves against the USD always seems to surprise, however there really can be no surprise anymore at the increased volatility of the NZD/USD exchange rate since the global financial crisis in 20089/2009.
It is the new norm, and rightly or wrongly local exporters and importers have to adjust their expectations and thus risk management approach to the now seemingly regular three and four cent gyrations over short spaces of time.
The rebound in the Kiwi from 0.7500 only a few short weeks ago to rates above 0.8000 again is a case in point.
Exporters in USD’s who did not have the discipline to increase hedging percentages on the way down probably held back from acting when it was zooming back up again.
However, the reasons behind the five cent jump in the exchange rate do not appear to be permanent in that they are not funds flowing into New Zealand to stay in bond or equity portfolios.
Instead, the recent Kiwi dollar buying appears to be more speculative/short-term in nature related to punters not wanting to be exposed to other potentially depreciating currencies and the NZ dollar and Australian dollar stand out as alternative safe-haven beacons in the stormy seas of global financial and investment markets.
The forces behind the recent gains from 0.7500 to 0.8000 are summarised as follows:
- The wide-spread uncertainty amongst global investors at the time of the Greek election in mid-June prompted safe haven buying of the NZD and AUD. The impact of political and economic developments in Greece has been quickly forgotten about by the markets in the weeks since.
- Weak jobs numbers in the US in April and May increased expectations that the Federal Reserve would embark on QE3 monetary easing i.e. printing more USD’s, which weakens the USD on forex markets and is positive for the NZD and AUD growth/commodity currencies. The June employment increase of 80,000 was an improvement, however still below some expectations.
- The NZD posted further gains from 0.7900 to over 0.8000 when the European leaders actually seemed to make progress on bank bail-outs and fiscal reforms at their EU summit meeting a week ago. However, the market euphoria from those announcements has rapidly dissipated as it is realised that the detail is more difficult than the headline grabbing pronouncements.
- The strong +1.1% NZ March quarter GDP growth number released on 21 June has removed the previous moneymarket pricing-in of 0.50% cuts to the OCR. Further interest rate reductions by the RBNZ were never likely, however that negative for the Kiwi dollar has now disappeared.
A weaker Euro exchange rate against rate against the USD to a two-year low of $1.2260 following the 0.25% cut to 0.75% in Euro interest rates by the ECB last week has pulled the Kiwi dollar back to 0.7960.
Over coming weeks the dominant influence over NZD/USD direction will be US economic data. In particular, the minutes of the Federal Reserve FOMC meeting on 12 July, to see how close they were to QE3. Stronger US data will decrease the probability of further monetary policy stimulus by the Fed when they next meet in early August.
The USD itself would strengthen, NZD weaken on stronger US economic data.
In the short-term therefore, given the nature of the recent buying and the likelihood of more positive US economic data, the Kiwi dollar has a greater probability of pulling back further to 0.7700/0.7800 than appreciating further to well above 0.8000.
However, the performance of the NZ economy over the next six to nine months will determine how soon in 2013 official interest rates are increased from their 2.5% record lows.
The greater probability remains that the Kiwi dollar will be trading back to 0.8500 and possibly higher in 2013 when the RBNZ are forced to remove the emergency monetary stimulus put in place in March 2009.
The signs are that economic growth, thus inflation risks (e.g. rising rents) will be stronger than what most forecasters, including the RBNZ, anticipate.
Not too much notice should be taken of this week’s quarterly survey of business confidence from NZIER, as they inexplicably omit the largest industry in NZ from their survey, agriculture.
Rising residential property prices should lift both business and consumer confidence survey results over coming months.
The NZD/EUR cross-rate has been double-whammied by a weak Euro and stable NZD against the USD at the higher levels. Eventually the JPY/NZD and NZD/AUD cross-rates will also lift as the markets recognise the interest rate differentials will in the future favour the NZD over those two major currencies.
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* Roger J Kerr runs Asia Pacific Risk Management. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com
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